Israeli Natural Gas Extraction: A New Strategic Opportunity for the United States in the Middle East?

A natural gas revolution is currently sweeping across the United States. While not without a degree of controversy, the sheer breadth of these new discoveries has the potential to reduce greenhouse gas emissions, stimulate the American manufacturing industry, and, critically, serve as a stepping stone towards greater energy independence and security.

Yet, America is not the only place where a natural gas revolution is underway. Israel is also beginning to explore and grapple with the implications of its own recently discovered natural gas reserves. A 2010 USGS survey indicated that the Levant Basin contains some 3,450 billion cubic meters (bcm) of natural gas – 850 bcm of which have already been found in Israel’s territorial waters. At current market rates, these massive reserves are valued at almost a quarter of a trillion dollars. However, in addition to providing Israel with an economic boon, these reserves can also help forward American regional interests in a number of important ways:

Israeli reserves are critical to the country’s energy security. The country is an ‘energy island’ and has been largely dependent on imports to meets its power generation and fuel needs. With these recent gas finds a crucial American ally in a pivotal region is taking a significant step towards addressing a key security concern.

Israeli gas may be exported to Europe, where Russia has wielded a broad – and often disruptive – influence in the energy market. The addition of an Israeli supply chain could help mitigate the stronghold that Russia has held on the EU for the past decade, inducing a more complacent posture from Moscow and providing American allies in Europe with increased flexibility when crafting policy.

The current wave of resource discoveries in the Eastern Mediterranean has heightened tensions regarding national borders, especially between Israel and Lebanon. America has already begun brokering a bilateral agreement – a move that could provide Washington with an opportunity to regain political capital and re-establish itself as a credible arbiter in the region.

Israel’s natural gas revolution could have immense implications for American foreign policy. In addition to helping secure a key ally in the region, US policymakers should also consider how Israel’s gas reserves could impact the regional geopolitics and assess how Washington, even in an ancillary role, can leverage these new energy market dynamics to its strategic advantage.

Israeli Gas to the Rescue

Israel has been and, for the foreseeable future, will continue to be an energy island. That is to say that the country does not have any energy sharing agreements with its neighbors and is unable to draw on nearby electrical grids in the event of a crisis. Until now Israel also has had negligible domestic natural resources, forcing the country to import the vast majority of all its energy needs.

This stark reality was further compounded when, during the Arab Spring, more than a dozen attacks were launched in Sinai on the EMG pipeline, which carried some 1.6 bcm of natural gas from Egypt to Israel. Egyptian imports provided Israel with close to 40% of its gas needs, and, at the time of the attacks, natural gas was accounting for about 40% of the country’s total power generation. With fuel transfers effectively suspended for the duration of the attacks, and the import agreement officially terminated in March 2012, pressure began to mount on Israel’s energy sector.

An energy crisis erupted in the summer of 2012, when Israel’s national electricity provider was forced to import more expensive fuel, like diesel, to make up for the shortfall, causing a sharp rise in the price of electricity. Furthermore, Israel’s natural gas reserves are not slated to come online for another few months and a lack of capacity in the power generation sector led to sporadic blackouts throughout the summer.

Overall, this episode was important in that is underscored two critical points: Israel’s energy situation is incredibly precarious, given its dearth of domestic natural resources; Israel cannot depend on other countries for its energy security and needs to move towards self-sufficiency as much as possible.

With enough proven and prospective gas reserves to meet the country’s power generation demands for decades to come, Israel is now also weighing the use of natural gas to transform its transportation sector, a move that would give the country even greater insulation from foreign energy markets.

If Israel is able to meet the majority of its energy demands with domestic reserves, the US will have a fundamentally stronger and more secure ally in a pivotal region of the world. For example, it was reported that during the 2006 Lebanon War Israel was dangerously close to a fuel crisis, as importers refused to approach the coast during the fighting. A stable and robust domestic production capacity could help alleviate such situations in the future. Additionally, if Israel decides to move authorize natural gas exports, these world-class finds could also aid other American allies diversify their own energy supplies and help mitigate the impact of deleterious foreign influences.

David vs. Goliath: How Israeli gas threatens Gazprom dominance in the EU

For more than a decade, the European natural gas market has been a Russian-dominated affair. Moscow, through its state-owned enterprise Gazprom, has been the single largest supplier of natural gas to the EU, typically responsible for importing between a quarter and a third of the EU’s annual natural gas consumption. Gazprom has also established or holds stakes in dozens of subsidiaries across the EU, including in downstream sectors, like power generation, which gives the Russian gas giant control over critical pieces of energy infrastructure, too.

The key position that Gazprom holds in the EU energy market has given Moscow wide ranging influence and geopolitical clout. Consider that multiple pricing disputes between Gazprom and the Ukraine resulted in gas imports being cut on three separate occasions. Moreover, because Ukraine is the entry point for some 80% of Russian gas into the EU, the shortage affected numerous Western European markets, too. Gazprom has also cut gas supplies to Moldova, Lithuania, and Latvia. In addition, claims have been made that Russia sought to influence policy in Europe’s former Soviet States using supply agreements as leverage. In short, Moscow has shown it possess both the determination and capacity to cut critical natural gas supplies to the EU market, a concern that could hang over EU policy decisions in any number of critical scenarios.

There are, however, two important qualifications to the current situation. The first is that the relationship is a two-way street: as much as the EU relies on Gazprom for its gas, so, too, does Gazprom rely on the EU – the European market accounts for some 80% of the company’s income. The second caveat is that the Brussels is aware that it has become increasingly beholden to Moscow and is actively looking to diversify its natural gas supply chain.

In light of these realities, the EU has begun increasing natural gas imports from countries like Algeria and Qatar. Several European states have also commenced domestic exploration operations in search of unconventional reserves, such as those found in the US. The EU has also revisited pipeline proposals emerging from the Caucasus. However, these options also have risks. Indeed, questions should be raised regarding the volatility of export markets like Algeria, where an Islamic attack in January claimed the lives of dozens of at a natural gas plant in the country’s south, as well as the domestic opposition that exists to shale gas exploration in several European markets. There is also the desire to avoid Iranian gas, which analysts say would be necessary for any Caucasian pipeline to be viable. As such, Israel’s new offshore reserves, free of the above entanglements, present an even more promising option.

For its part, Gazprom is well aware of the shift that is taking place. Given the primacy of the EU market to its export economy, Moscow has moved swiftly to enhance its delivery capacity and secure potentially competitive resources. That includes pushing forward two new pipelines – the Nord Stream and the South Stream – that would enable Gazprom to ship an additional 118 bcm a year to Europe, which would almost double its current export capacity and further entrench its position within the EU market.

Moscow’s desire to stifle any competing gas import projects also sheds light on why Gazprom established an Israeli subsidiary and made a strong bid to become a strategic partner in Israel’s Leviathan concession, the country’s largest natural gas find to date. Reports from Israeli ministries increasingly suggest that Moscow would have sought to stymie the development of its reserves.

At present, Israeli natural gas exports have yet to be approved, but there are, nevertheless, some encouraging signs. The inter-ministerial committee tasked with formulating Israel’s natural gas policy issued a final report in September 2012 recommending that almost half – some 500 bcm – of the country’s prospective reserves be allowed for export. Moreover, the entrance of Australian Woodside Energy as a partner in the Leviathan field (which won the tender instead of Gazprom) means that Israel now works with a company that possesses deep experience in natural gas exports. There have also been ongoing discussions between Israel and its closest EU neighbor, Cyprus, concerning the joint development of a liquefied natural gas (LNG) export facility or the join operation of a pipeline bringing Eastern Mediterranean gas all the way to Greece.

Natural gas exports from Israel are far from a done deal – especially in light of the country’s recent elections, which will likely delay this politically divisive issue for several months. Yet there are already questions as to the final destination of any gas exports.

Far East markets, like Japan and South Korea, pay a third more for LNG than European markets. That being said, the Far East market is highly competitive as well as risk averse. Australia, Qatar, and Indonesia are in closer proximity and have longer relationships with and a greater capacity to service the Pacific. Newly discovered reserves in Eastern Africa may also flood Far East markets in coming years. In addition, China and India, the region’s largest energy consumers, are still using a large amount of coal for power production, a trend that does not seem likely to reserve in the near future, as coal still remains a cheaper fuel source than liquefied natural gas. Thus, Israeli exports to the Far East, while not impossible, become less probable in light of these factors. The European market, however, is closer to Israel, has a continental emissions scheme which benefits from increased usage of natural gas, and has proven itself open to the entry of multiple players.

If exports to the EU are approved, then an influx of Israeli gas into the EU could help displace Russian natural gas, giving European states a greater level of energy diversity and foreign policy flexibility. In this way, America’s interests would again be well served by enhancing the security of key European allies and diminishing the geopolitical leverage that Moscow has shown it can wield through its gas supply agreements.

America Re-Engaged

The geopolitical ramifications of natural gas in the Eastern Mediterranean are, without a doubt, incredibly significant. In addition to providing several countries with a chance of achieving a high-level of energy independence and import diversity, these natural resources could also serve as a cornerstone of greater stability within the region.

Israel and Lebanon, the two countries whose territorial waters comprise the largest percentage of the Levant Basin, have a great deal to gain – and lose – in the exploitation of their respective natural resources. However, the two countries have been at a state of war since 1948 and lack an official maritime border. The issue here is a critical one. The absence of clear boundaries could not only be a major obstacle to securing investment, but, given the tempestuous relationship between the two neighbors, any conflicting claims could quickly be turned into the pretext of a broader conflict.

That being said, both countries have already submitted individual proposals to the UN delineating their southern maritime boundary, which has resulted in an overlapping claim concerning a 330 square mile swath of territory.

Considering that none of Israel’s current finds appear contestable and that Lebanon has yet to make any discoveries in its own offshore waters, the two countries are at an important juncture, where demarcating boundaries at this point could help avoid future conflict.

While the conflicting claims seem to stem out of an earlier agreement that Lebanon and Cyprus drafted regarding their respective maritime boundaries, as well as Lebanese interpretations of steps Israel took when parceling out its natural gas concessions along its northern border, the general consensus seems to be that the two countries are unable to resolve this dispute bilaterally.

To assist the two parties in reaching an agreement, the United States has quietly and swiftly entered the fray by dispatching seasoned Middle East diplomat Fredric Hoff to help achieve a resolution. Hoff and his team have been mediating since mid-2011 and may actually have made some headway,according to Lebanese diplomatic sources. The US hasreportedly submitted a proposal to both sides, predicated on a compromise of the overlapping claims that largely follows the guidelines of international law.

Although a resolution is by no means guaranteed, particularly in light of the historical intricacies of the Israel-Lebanon relationship, the role the US has begun to play here is important. If able to arbitrate an equitable solution to this thorny issue, Washington will have taken a step towards re-establishing the US as a credible negotiator in a region where it has seen its influence and standing wane over recent years.

Success, in this regard, will provide the US with political capital and a reinvigorated reputation as a goal-oriented negotiator that will be indispensable to American foreign policy – especially if the next time the US engages in the region it may concern an issue more divisive and with higher stakes than a maritime border dispute.

Conclusion

For a country that was once limited in terms of natural resources, Israel’s potential to reduce its energy dependence through domestic natural gas production is an economic game changer. It also holds enormous implications for the country’s security. In light of the cancelled gas accord with Egypt, Israel’s gas reserves will help the country meet its growing energy demands. The transportation sector and local industry are already taking note, too, as factories across the country are quickly securing supply agreement and the government has begun exploring the conversion of heavy vehicle fleets to run on natural gas.

It is also important to consider the impact that Israeli natural gas exports could have on the European market, where Moscow has used supply agreements to push, pull, and even punish states into alignment with Russian interests. Moreover, recent events in Algeria, which also exports natural gas to the EU, means that secure supplies from a regional ally like Israel become increasingly attractive.

The United States has also seized another opportunity to bolster its foreign policy clout in the region by helping to arbitrate a border agreement between Israel and Lebanon. The successful demarcation of a maritime border between the two countries would not only help ease investor concerns and spur increased development of offshore reserves in the Levant Basin, but it would also accrue the US significant political capital for defusing a potentially charged issue with an equitable and preemptive solution.

Finally, it is worth noting that Israel and the US have a long history of mutual collaboration when it comes to research and development, and the energy sector should be no exception. Opportunities for joint R&D programs, technology transfer programs, and foreign direct investment initiatives should not be underestimated. The potential for collaboration between Israeli and US firms has extended to new areas thanks to burgeoning natural gas economies in both nations. Now it’s just a matter of having the wherewithal and the funding to get the job done.

Brett Goldman is a Contributing Writer to The Truman Doctrine. Brett is the Co-Founder of the American Israel Business Lab (AIBL) an initiative that seeks to commercialize Israeli innovations and create jobs in the US. Brett consults for a number of projects, non-profit organizations and companies in the United States and abroad focusing on business development and strategic communications. Brett has worked as a political consultant since 2005 working on the field and communications teams for several local and state level candidates. Brett received his MA in Government from IDC Herzliya (‘10) and currently lives in Philadelphia.

Ari Indyk works as a consultant and provides support to clients in the energy sector, focusing on stakeholder engagement, business strategy and strategic communications. He has a deep understanding of the industry, government, media nexus and a proven track record in helping clients leverage local market expertise to achieve their goals. He received his MA in Government from IDC Herzliya and recently moved from Tel Aviv to Vancouver. To learn more about developments in Israel’s energy sector, follow his blog atwww.israelenergyportal.com.

Views expressed here are the authors’ own and do not represent the Truman Project.

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